Proposed Rule: OSC Rule - 45-503 - Trades to Employees, Executives and Consultants

NOTICE OF PROPOSED RULE UNDER
THE SECURITIES ACT
RULE 45-503
TRADES TO EMPLOYEES, EXECUTIVES
AND CONSULTANTS

Substance and Purpose of Proposed Rule

On February 20, 1998, the Commission published the proposed Rule for comment at (1998), 21 OSCB 1122 (the "February Proposed Rule").

The substance and purpose of the proposed Rule is to provide exemptions from the registration and prospectus requirements of the Securities Act (the "Act") for trades by issuers of theirsecurities to employees of the issuer and affiliated entities of the issuer and officers and directors of the issuer ("executives") and the subsidiary entities, Registered Retirement Savings Plans("RRSPs") and Registered Retirement Income Funds ("RRIFs") of such persons, consultants of the issuer and their companies, partnerships, RRSPs and RRIFs and to and by trustees,custodians and administrators acting on behalf or for the benefit of employees, executives and consultants ("administrators"). The proposed Rule also provides an exemption from theregistration and prospectus requirements for distributions by controlling shareholders of issuers of securities to these persons and entities. The proposed Rule provides exemptions from theregistration requirements for trades by affiliated entities of issuers and, in the case of control person distributions, issuers as well, in furtherance of trades under the exemptions in theproposed Rule. The proposed Rule also provides registration exemptions for trades by employees and executives of an issuer and their subsidiary entities, RRSPs and RRIFs and consultantsof an issuer and their companies, partnerships, RRSPs and RRIFs, and administrators, if the issuer has a de minimis market in Ontario.

These exemptions incorporate and extend the existing exemptions in paragraph 19 of subsection 35(1) and clause 72(1)(n) of the Act, as amended by the Red Tape Reduction Act (Ministryof Finance), 1997, which provide exemptions from the registration and prospectus requirements for trades made by an issuer in securities of its own issue with its employees or theemployees of an affiliate who are not induced to purchase by expectation of employment or continued employment, whether these trades take place directly between the issuer and theemployee or through a trustee or an administrator of a share purchase plan established for the benefit of employees of the issuer or its affiliates.

The proposed Rule also incorporates and replaces the Rule In the Matter of Trades by an Issuer in Securities of its Own Issue to Senior Officers, Directors, Personal Holding Companiesand Registered Retirement Savings Plans and a Controlling Shareholder in Securities of an Issuer to Employees, Senior Officers, Directors, Personal Holding Companies and RegisteredRetirement Savings Plans (1997), 20 OSCB 1218, which came into force on March 1, 1997, which in turn incorporated the Blanket Ruling of the same name (1994), 17 OSCB 5518 (the"Blanket Ruling").

As a result of comments received on the proposed Rule, recommendations and further deliberations of the Commission, the Commission has amended the proposed Rule and is re-publishingit for comment.

Changes Made to the Proposed Rule

The purposes of the changes to the proposed Rule are:

(a) to simplify the definition of "consultant", making it less restrictive and more objective;

(b) to expand the registration and prospectus exemptions provided in the Rule to trades to non-employee officers and non-employee officers of affiliated entities of issuers;

(c) to clarify that a transfer of an option to children or grandchildren of the optionholder other than minor children or minor grandchildren will not be permitted under the terms of a non-transferable option;

(d) to narrow the category of persons to which the quantitative restrictions on the use of exemptions for executives will apply, to directors and senior officers;

(e) to delete the requirement that the participation of a non-employee director in a trade be voluntary for the registration and prospectus exemptions contained in the Rule to be available;

(f) to clarify that the de minimis registration and prospectus exemptions provided in the Rule are available only if the issuer is not a reporting issuer in Ontario;

(g) to provide greater clarity as to the required standard for disclosure and to provide additional specific requirements regarding the information to be disclosed to shareholders in connectionwith any required shareholder approval under Part 4 of the Rule;

(h) to clarify the parties to an agreement which provides for the establishment of the price, for the purposes of the registration and prospectus exemptions provided for trades by current orformer employees, executives or consultants of an issuer which is not a reporting issuer;

(i) to conform the provisions contained in Part 10 of the proposed Rule relating to methods of disclosure of exempt trades more closely to the first trade requirements of Part 9; and

(j) other minor drafting changes of a clarificatory nature.

The amended proposed Rule accomplishes the foregoing by:

(a) revising the definition of "consultant" to delete certain of the conditions contained therein, and revising the remaining conditions;

(b) providing for definitions of "issuer-director" and "issuer-officer" so as to include non-employee officers and non-employee directors of affiliated entities in the definition of "executive"for the purposes of the Rule;

(c) revising the definition of "non-transferable option" to clarify that transfers are permitted to minor children or minor grandchildren of the optionholder, but not to children orgrandchildren of the optionholder other than minor children or minor grandchildren;

(d) revising the definition of "related person" by replacing the reference to "executive" with a reference to "a director or senior officer";

(e) revising paragraph 1.2(6)(b) to replace the reference to "executive" with a reference to "issuer-officer" and revising paragraphs 3.1(b), 3.3(c), 5.1(1)(b) and 8.1(1)(a) to refer to "issuer-officer" instead of "executive";

(f) revising sections 2.4, 3.3 and 3.5 to provide that a condition of each of these exemptions is that the issuer is not a reporting issuer;

(g) revising section 4.1 to provide a standard for the level of required disclosure and to add further provisions relating to the types of information to be disclosed in an information circularrespecting an incentive, incentive plan or amendment to an incentive or incentive plan which is required to be approved by shareholders;

(h) revising paragraph 8.1(1)(c) to provide that the price of the security being traded is established by a generally applicable formula or similar provisions contained in a written agreementamong some or all of the shareholders of the issuer to which the transferee is, or upon becoming a transferee, is required to be, a party;

(i) deleting the references to section 3.3 in Part 9 and Part 10 and amending the provisions of Part 10 to refer to the number of securities of the class of securities traded instead of the volumeof trading in securities; and

(j) minor revisions to other provisions of the Rule to provide greater clarity.

Reasons for Changes

After consideration of comments received on the February Proposed Rule and further review, the Commission has determined to revise the definition of "consultant" from that contained inthe February Proposed Rule. The definition was revised by deleting the requirements for (a) "ongoing" services, (b) possession of technical, business management or other expertise of valueto the issuer or an affiliated entity of the issuer, and (c) the consultant having a relationship with the issuer or an affiliated entity of the issuer that enabled the individual to be knowledgeableconcerning the business and affairs of the issuer. The Commission determined that these requirements were overly restrictive, having regard to the fact that no such restrictions wereimposed on the use of these exemptions for employees, and also that these restrictions were not sufficiently objective for the purposes of the Rule. While the Commission has retained therequirement that a consultant spend a significant amount of time and attention on the affairs and business of the issuer or an affiliated entity of the issuer (as an employee normally would) tobe eligible for the exemptions, to provide a more objective condition for the purposes of the Rule the provision has been revised to provide that this determination is to be made in thereasonable opinion of the issuer.

As a result of comments received on the proposed Rule, recommendations and the consideration of relevant policy issues, the Commission has determined that the definition of "executive"should be expanded to include non-employee officers and non-employee directors of affiliated entities of the issuer. The exemptions will be provided for non-employee senior officers andnon-employee directors of affiliates, as was the case under the Blanket Ruling.

As a result of comments received on the proposed Rule, recommendations and the consideration of relevant policy issues, the Commission also determined to revise the definition of "relatedperson". Formerly, the definition of "related person" referred to "executive" which in turn referred to directors and officers of the issuer. The Commission has determined to narrow thedefinition to provide that a related person is a director or senior officer of the issuer, as the Commission believes that the relevant quantitative restrictions contained in section 3.2 of the Ruleshould apply only to directors and senior officers, not directors and all officers of the issuer.

As a result of further review, the Commission has determined to revise the definition of "non-transferable option" to provide that transfers would be permitted in the case of transfers tominor children or minor grandchildren of the optionholder, but not to children or grandchildren who are not minor children or minor grandchildren, as the Commission did not believe itwas appropriate to provide exemptions for the grants of options which could be transferred to non-minor children or non-minor grandchildren.

As a result of comments received on the proposed Rule, recommendations and the consideration of relevant policy issues, the Commission determined that the requirement that theparticipation of non-employee directors in a trade being voluntary would not be a condition of the exemptions contained in the Rule. The Commission takes note of the fact that a number ofissuers require the participation of non-employee directors in stock option and share purchase plans. The Commission also notes that requiring the voluntary participation of non-employeedirectors in a trade as a condition of the exemption was a change from the Blanket Ruling, which did not contain this condition. The Commission has determined that it is not inappropriatefor issuers, if they so wish, to impose share ownership as a condition of being a director, without such issuers losing the benefit of the exemptions.

After further review and consideration of recommendations, the Commission determined that the de minimis registration and prospectus exemptions contained in the proposed Rule shouldonly be available if the issuer is not a reporting issuer in the Province of Ontario, as it would not be appropriate for issuers which were reporting issuers in the Province of Ontario to be ableto utilize these exemptions instead of the other exemptions in Parts 2 and 3.

After further review and consideration of recommendations, the Commission determined that it would be appropriate to provide greater clarity as to the required standard of disclosure andto specifically require disclosure relating to the categories of persons eligible under incentives or incentive plans, and, in the case of options, the term and the basis for pricing, as part of therequired disclosure in a circular in connection with obtaining shareholder approval of incentives, incentive plans or amendments thereto.

After further review and consideration of recommendations, the Commission determined that it would be appropriate to clarify the requirements relating to the parties to an agreementestablishing the price of the security for the purposes of the exemptions contained in section 8.1, as the Commission believes the exemption should be available even if there are parties to theagreement other than employees, executives or consultants.

Summary of Comments

On February 20, 1998, the Commission published for comment the February Proposed Rule. The Commission received three submissions. The list of commenters is contained in Appendix"A" of this Notice.

The Commission has considered all of the comments received on the proposed Rule, and would like to thank all the commenters for providing their comments on the proposed Rule. Thefollowing is a summary of the comments received, together with the Commission's responses and, where applicable, the changes adopted by the Commission.

Section 1.1. Definitions.

"consultant"

One commenter submitted that paragraphs (a), (b) and (c) of the definition of "consultant" were subjective and would give rise to a number of issues in ascertaining whether a serviceprovider would fall within the definition of "consultant" and should be deleted or redrafted to avoid creating difficulty in determining whether a service provider to an issuer falls within thisdefinition.

Another commenter enumerated a number of reasons why the rules relating to the issuance of securities to consultants were very important to the biotech community.

This commenter did not see the reason for a lengthy definition of "consultant", which restricted the eligible class of service providers for the purposes of the exemption. The commentercited the employee exemption contained in section 72(1)(n) of the Act and the associated Blanket Rulings, to the effect that employees, directors and senior officers did not need theprotection of a prospectus, if they were not coerced into the trade. The commenter noted that the proposed Rule does not impose any requirements of knowledge, expertise, length of serviceor other qualifications on these persons, and submitted that it was inconsistent to do so for consultants.

The commenter also noted that the most frequent use of these exemptions is for the issuance of options and the issuance of shares upon exercise of the option. The commenter took the viewthat investor protection concerns do not justify limiting the range of consultants permitted to receive options where there is no initial financial risk, and very little risk at the time of exercise,and that these limitations would be very harmful to biotech companies who rely on the ability to grant options to attract consultants.

This commenter also submitted that the proposed Rule goes much further than the TSE requirements with respect to stock option plans permitting the granting of options, so that theproposed Rule narrows the range of persons to whom TSE-listed companies are permitted to issue options.

The commenter was of the view that the TSE rules and those of the prospectus requirements and exemptions contained in the Act have entirely different purposes, and so the commentersubmitted that the additional requirements imposed by the proposed Rule for consultants are unnecessary, at least in the context of options, and do not serve the purposes of the Act.

The commenter made a number of specific points. First, the commenter objected to the use of the word "ongoing" in the definition of "consultant", due to its ambiguous nature. Thecommenter submitted that it is inappropriate to distinguish among consultants regarding eligibility to acquire securities and that it should be for the company to decide the value of theservices rendered and whether options were appropriate compensation. Second, the commenter objected to the reference to "under a contract"; the commenter suggested that if there is arequirement for a written contract, the proposed Rule should say so. Third, the commenter took the view that the requirement for "a significant amount of time and attention" is vague,particularly when coupled with the "ongoing" requirement. Fourth, the commenter pointed out that the requirement for a "relationship" enabling the consultant to be "knowledgeable aboutthe business and affairs of the issuer" could create severe problems for many biotech companies, because, in some cases, of confidentiality and conflict of interest concerns.

The commenter suggested that the above concerns could be addressed by amending the definition of "consultant" to focus on a requirement for bona fide consulting services provided to theissuer. The commenter noted that the risk of back-door underwritings is low for TSE-listed companies, and the proposed imposition of similar requirements on non-TSE companies forissuances to executives could be extended to issuances to consultants. The commenter therefore suggested moving the exemption for issues of securities to consultants from Part 2 to Part 3.

Response:

After consideration of comments received on the February Proposed Rule and further review, the Commission has determined to revise the definition of "consultant" from that contained inthe February Proposed Rule.

The definition has been revised by deleting the requirements for (a) "ongoing" services, (b) possession of technical, business, management or other expertise of value to the issuer or anaffiliated entity of the issuer and (c) the consultant having a relationship with the issuer or an affiliated entity of the issuer that enables the individual to be knowledgeable concerning thebusiness and the affairs of the issuer. The Commission determined these requirements were overly restrictive, having regard to the fact no such restrictions are imposed on the use of theseexemptions for employees and executives, and also that these restrictions were not sufficiently objective for the purposes of a rule.

While the Commission has retained the requirement that the consultant spend a significant amount of time and attention on the affairs and business of the issuer or an affiliated entity of theissuer, as an employee normally would, to provide certainty for the purposes of the Rule the provision has been revised to provide that this determination is to be made in the reasonableopinion of the issuer.

The requirement that the consultant provide consulting, technical, management or other services to the issuer or an affiliated entity of the issuer has been revised to provide that theseservices be provided on a bona fide basis.

The definition has also been revised to require that the consultant provide these services under a written contract, to provide for certainty and to ensure privity between the consultant and theissuer or the affiliated entity.

Apart from the specific requirements relating to hold periods for trades to associated consultants and investor consultants, the Commission believes that the exemptions in the proposed Ruleprovided for trades to consultants should be available on the same conditions as the exemptions provided for trades to employees. Accordingly, the Commission has determined not toimpose the restrictions contained in Part 3 of the Rule relating to exemptions for trades to executives on the exemptions for trades to consultants. The Commission notes that the exemptionscontained in Part 2 would not be available to consultants who are executives.

"employee" and "executive"

One commenter stated that is was not clear whether the intent of the proposed Rule is to provide registration and prospectus exemptions in connection with the issue of securities by an issuerto the officers of affiliated companies of the issuer. The commenter pointed to footnote 6, as well as the definition of "employee" and sections 2.1 and 3.1. as the sources of the confusion.The commenter suggested that if a distinction between "executive" and "employee" is justified, the definitions of these terms should be modified to clearly state that exemptions are alsoavailable in the case of the issue of securities by an issuer to officers of the issuer's affiliates.

Response:

The Commission believes that the February Proposed Rule, as drafted, provided the exemption previously provided for trades to employee officers, subject, however, to the new restrictionscontained in Part 3.

However, the February Proposed Rule did not extend the exemption to non-employee directors and non-employee officers of affiliated companies of issuers, as was the case under the BlanketRuling.

After consideration of comments and further review, the Commission has determined to revise the definition of "executive" to include non-employee directors and non-employee officers ofaffiliated entities, as these exemptions were provided for non-employee officers and non-employee directors of affiliated companies under the Blanket Ruling.

"incentive plan" and "incentive"

One commenter submitted that these definitions should be amended to include the various elements of "Share Compensation Arrangements", to ensure consistency with the TSE CompanyManual.

Response:

The Commission believes the definition contains the essential elements of the definition required for the purposes of the Rule, being a compensation or incentive mechanism, and that listingexamples of such arrangements, while perhaps appropriate for the TSE Company Manual, is not appropriate for a rule.

"associated consultant" and "investor consultant"

One commenter suggested that these definitions should be included in the definition of "consultant". The commenter did not believe that any consultant in compliance with the definition of"consultant" should be subject to a hold period in respect of securities received in the capacity of consultant and the commenter therefore suggested deleting Part 9 of the proposed Rule.

Response:

The Commission disagrees with the commenter on this point, and has made a policy decision to impose hold periods on the specified types of consultants, in the interests of investorprotection and to avoid the risk of back-door underwritings. The Commission also believes the requirements in the Rule should be consistent with those contained in the proposed Rule 48-502 Over-Allotment Options and Underwriters' Compensation, published for comment April 25, 1997 (1997), 17 OSCB 2177.

In addition, for trades to persons under the exemptions in the Rule other than those specified types of consultants, Part 9 simply re-states and clarifies the existing regime relating to firsttrade relief and it is therefore inappropriate to delete it.

"related person"

One commenter suggested amending this definition to conform to the definition of "insider" of the TSE Company Manual.

Response:

The Commission for the most part agrees with the commenter's suggestion. The definition of "related person" has been narrowed from that contained in the February Proposed Rule byreplacing the reference to "executive" with a reference to "a director or senior officer", so as to exclude officers other than senior officers from the quantitative restrictions in section 3.2.This would be more consistent with the definition of "insider" in the TSE Company Manual which is used for the same purpose.

Subsection 1.2(6), Part 3

One commenter did not agree with the position that prospectus and registration exemptions should only be available in the case where participation by an executive in a trade is voluntary.The commenter believed that regulators should look favourably upon mandatory plans as they do not involve any investment decision on the part of the participant, particularly wherepurchases are made automatically, and by directors and officers who are sophisticated investors and aware of the issuer's business.

Response:

The phrase " ... if the participation of the (employee) (officer) (consultant) in the trade is voluntary" is used in a condition for exemptions in the Rule, and reflects the condition in paragraph19 of subsection 35(1) and clause 72(1)(n) of the Act that those exemptions are available only if the employees are not "induced to purchase by expectation of employment or continuedemployment". The February Proposed Rule contained a condition that, in the case of an executive that was a director, the individual director was not induced to purchase the security byexpectation of the director's appointment, election or re-election as a director of the issuer. This was a change from the Blanket Ruling, which did not contain this condition for the use ofthe exemption for trades to directors.

After consideration of comments on the February Proposed Rule, the Commission has determined that it is not inappropriate for issuers, if they so wish, to impose share ownership as acondition of being a director without losing the benefit of the exemption, and accordingly there will now be no change in this regard from the provisions contained in the Blanket Ruling.

The Commission has, however, determined that no change should be made in relation to employee officers. The Commission notes that this condition is imposed at the current time underthe Act for employees, whether or not they are officers. The Commission also believes that different considerations apply in the case of employees as opposed to non-employee directors andthat it is not inappropriate to deny the exemption if an employee (whether an officer or not) is required to purchase shares as a condition of employment or continued employment.

Section 3.2. Exemption for Trades by a Non-Listed Issuer or Administrator of Securities of the Issuer's Own Issue to Executives and Executive Administrators.

Incentives

One commenter submitted that trades in a security that is not a security of a listed issuer to an executive, where the security is not being issued as an incentive, should also be exempt fromthe prospectus and registration requirements, if such an executive is also an employee.

Response:

The Commission believes section 3.2 as drafted provides these trades are exempt.

Non-Employee Executives

This commenter also suggested that section 3.2 should be re-drafted if the intent is not to make the prospectus exemption available to non-employee executives.

Response:

The intent is to make the prospectus exemption available to non-employee executives. The Commission believes Part 3, together with the definition of "executives" in Part 1, as drafted,provides the exemption to non-employee executives.

Shareholder Approval Requirements

One commenter submitted that the shareholder approval requirements contained in paragraph 3.2(a) should parallel the requirements of section 632 of the TSE Company Manual, whichallows for confirmation by shareholders at the next shareholders meeting if shares are not issued until that approval is obtained.

Response:

Although this flexibility would be useful, this submission cannot be accepted, since this change would create a condition subsequent to the exemption which is not appropriate for a rule.

Section 11.1. Fees.

One commenter submitted that the requirement to pay fees on the date of adoption of, or when the securities are distributed under, a "service provider plan" is administratively burdensome.

Response:

The Commission does not agree with the commenter's position on this point; issuers pay these fees under the current regime. Generally speaking, fees are payable for all prospectus-exemptdistributions.

General Comment

One commenter submitted that the proposed Rule should clarify whether the issue of shares upon the exercise of options would be exempted under 35(1)12 (iii) and 72(1)(f)(iii) of the Act,or under sections 2.2 and 3.1 of the proposed Rule.

Response:

Under the Act, the issue of shares upon the exercise of options may be exempt under subparagraph 12(iii) of subsection 35(1) and subclause 72(1)(f)(iii) and, if the optionee is an employee,also under paragraph 16 of subsection 35(1) and clause 72(1)(n). Under the Rule as drafted, and the relevant provisions of the Act, this will remain the case, as the issue of shares upon theexercise of options may be exempt under subparagraph 12(iii) of subsection 35(1) and subclause 72(1)(f)(iii) and, if the optionee is an employee, also under Part 2 or Part 3, as applicable.

No change to the proposed Rule is necessary in this regard.

Revocation and Amendment of Regulations

The Commission proposes to revoke subsections 69(4) and (5) of the Regulation, and section 24 of Schedule 1 to the Regulation.

The Notice accompanying the February Proposed Rule indicated that the Commission proposed to revoke subsection 69(3) of the Regulation. As it is the Commission's intention that otherproposed Rules will contain provisions similar to subsection 69(3) and that subsection 69(3) will be revoked at the time of the adoption of such rules, the Commission proposes to make Rule45-503 following the comment period for this re-publication of the Rule without revoking subsection 69(3) at that time. In this regard, the Commission notes that Rule 45-503 does notconflict with subsection 69(3) of the Regulation.

The Commission also proposes to amend section 20 of Schedule 1 to the Regulation to exclude from that provision fees relating to securities acquired on the exercise of service provideroptions. Fees relating to these securities are addressed in the proposed Rule.

Comments

Interested parties are invited to make written submissions with respect to the proposed Rule. Submissions received by September 21, 1998 will be considered.

Submissions should be made in duplicate to:

Daniel P. Iggers, Secretary

Ontario Securities Commission

20 Queen Street West

Suite 800, Box 55

Toronto, Ontario

M5H 3S8

A diskette containing the submissions (in DOS or Windows format, preferably WordPerfect) should also be submitted. As the Act requires that a summary of written comments receivedduring the comment period be published, confidentiality of submissions received cannot be maintained.

Questions may be referred to:

Cynthia Rogers

Legal Counsel

Ontario Securities Commission

(416) 593-8261

Proposed Rule

The text of the proposed Rule follows, together with footnotes that are not part of the Rule but that have been included to provide background and explanation.

DATED August 21, 1998.

ONTARIO SECURITIES COMMISSION RULE

RULE 45-503

TRADES TO EMPLOYEES, EXECUTIVES AND CONSULTANTS

TABLE OF CONTENTS

PART TITLE

 

PART 1 DEFINITIONS AND INTERPRETATION
1.1 Definitions
1.2 Interpretation

PART 2 TRADES BY AN ISSUER, AN AFFILIATED ENTITY OR ADMINISTRATOR OF SECURITIES OF THE ISSUER'S OWN ISSUE TO EMPLOYEES, CONSULTANTS ANDADMINISTRATORS
2.1 Removal of Exemption for Trades under Paragraph 19 of Subsection 35(1) and Clause 72(1)(n) of the Act
2.2 Exemption for Trades by an Issuer or Administrator of Securities of the Issuer's Own Issue to Employees, Consultants and Administrators
2.3 Registration Exemption for Trades by an Affiliated Entity of Securities of the Issuer's Own Issue to Employees, Consultants and Administrators in Furtherance of an Exempt Trade
2.4 De Minimis Registration Exemption for Trades by Employees, Consultants and Administrators

PART 3 TRADES BY AN ISSUER, AN AFFILIATED ENTITY OR ADMINISTRATOR OF SECURITIES OF THE ISSUER'S OWN ISSUE TO EXECUTIVES ANDADMINISTRATORS
3.1 Exemption for Trades by a Listed Issuer or Administrator of Securities of the Issuer's Own Issue to Executives and Administrators
3.2 Exemption for Trades by a Non-Listed Issuer or Administrator of Securities of the Issuer's Own Issue to Executives and Administrators
3.3 Exemption for Securities of Foreign-Listed Issuers and De Minimis Exemption for Trades by an Issuer or Administrator of Securities of the Issuer's Own Issue to Executives andAdministrators
3.4 Registration Exemption for Trades by an Affiliated Entity of Securities of the Issuer's Own Issue to Executives and Administrators in Furtherance of an Exempt Trade
3.5 De Minimis Registration Exemption for Trades by Executives and Administrators

PART 4 REQUIRED INFORMATION FOR SHAREHOLDER APPROVAL
4.1 Required Information for Shareholder Approval

PART 5 CONTROL PERSON DISTRIBUTIONS TO EMPLOYEES, EXECUTIVES, CONSULTANTS AND ADMINISTRATORS
5.1 Exemption for Control Person Distributions to Employees, Executives, Consultants and Administrators
5.2 Exemption for Trades by an Issuer, an Affiliated Entity or Administrator of Securities of the Issuer in Furtherance of a Control Person Distribution

PART 6 PERSONAL TRANSFERS
6.1 Personal Transfers

PART 7 REMOVAL OF CERTAIN EXEMPTIONS FOR TRADES OF SECURITIES OF CERTAIN COMPANIES
7.1 Removal of Certain Exemptions for Trades of Securities of Certain Companies

PART 8 TRADES MADE BY CURRENT OR FORMER EMPLOYEES, EXECUTIVES OR CONSULTANTS, OR ADMINISTRATORS OF SECURITIES OF CERTAIN NON-REPORTING ISSUERS
8.1 Exemption for Trades Made by Current or Former Employees, Executives or Consultants, or Administrators of Securities of Certain Non-Reporting Issuers
8.2 Registration Exemption for Trades by an Issuer or an Affiliated Entity of Securities of the Issuer in Furtherance of Exempt Trades made by Current or Former Employees, Executives orConsultants of Certain Non-Reporting Issuers

PART 9 RESTRICTIONS ON FIRST TRADES IN SECURITIES ACQUIRED UNDER EXEMPTIONS IN RULE
9.1 Restrictions on First Trades in Securities Acquired Under Exemptions in Rule

PART 10 DISCLOSURE OF EXEMPT TRADES
10.1 Disclosure
10.2 Disclosure Before Resale
10.3 Annual Disclosure
10.4 Monthly Disclosure
10.5 Form of Disclosure

PART 11 FEES
11.1 Fees

PART 12 EXEMPTION
12.1 Exemption

 

ONTARIO SECURITIES COMMISSION RULE
RULE 45-503
TRADES TO EMPLOYEES, EXECUTIVES AND CONSULTANTS⁽¹⁾

PART 1 DEFINITIONS AND INTERPRETATION

1.1 Definitions - In this Rule

"administrator" means an employee administrator or an executive administrator;

"associated consultant" means, for an issuer, a consultant of the issuer or of an affiliated entity of the issuer if

(a) the consultant is an associate of the issuer or of an affiliated entity of the issuer, or

(b) the issuer or an affiliated entity of the issuer is an associate of the consultant;

"consultant"⁽²⁾ means, for an issuer, an individual, other than an employee or an executive of the issuer, that

(a) provides on a bona fide basis consulting, technical, management or other services to the issuer or to an affiliated entity of the issuer under a written contract between the issuer or theaffiliated entity and the individual or a consultant company or consultant partnership of the individual, and

(b) in the reasonable opinion of the issuer, spends a significant amount of time and attention on the affairs and business of the issuer or an affiliated entity of the issuer;

"consultant company" means, for an individual consultant, a company of which the individual consultant is an employee or shareholder;

"consultant partnership" means, for an individual consultant, a partnership of which the individual consultant is an employee or partner;

"employee" means, for an issuer, an employee of the issuer or of an affiliated entity of the issuer, other than an executive of the issuer;

"employee administrator" means, for an issuer, a trustee, custodian or administrator acting on behalf or for the benefit of employees, consultants, employees and executives, employees andconsultants, executives and consultants, or employees, executives and consultants, of the issuer;

"executive" means, for an issuer, an issuer-officer or an issuer-director⁽³⁾;

"executive administrator" means, for an issuer, a trustee, custodian or administrator acting on behalf or for the benefit of executives, employees and executives, executives and consultants, oremployees, executives and consultants, of the issuer;

"foreign-listed issuer" means an issuer any of the securities of which are listed and posted for trading, or traded, on the American Stock Exchange, the New York Stock Exchange or theLondon Stock Exchange Limited or quoted on the Nasdaq Stock Market;

"hold period" means that period of either six, 12 or 18 months that would be applicable to a security, or an underlying security, if the security or underlying security had been acquired underan exemption referred to in subsection 72(4) of the Act;

"incentive" means a compensation or incentive arrangement for an executive;

"incentive plan" means a plan providing for incentives;

"investor consultant" means, for an issuer, a consultant that is a registrant or provides to the issuer or an affiliated entity of the issuer services provided by a registrant or services consistingof investor relations activities;

"investor relations activities" means any activities that promote or reasonably could be expected to promote the purchase or sale of securities of the issuer or an affiliated entity of the issuer,other than

(a) the dissemination of information provided, or records prepared, in the ordinary course of the business of the issuer

(i) to promote the sale of products or services of the issuer, or

(ii) to raise public awareness of the issuer; or

(b) activities or communications necessary to comply with the requirements of

(i) Ontario securities law, or

(ii) the by-laws, rules or other regulatory instruments of a SRO;

"issuer-director" means, for an issuer, a director of the issuer or of an affiliated entity of the issuer⁽⁴⁾;

"issuer-officer" means, for an issuer, an officer of the issuer or of an affiliated entity of the issuer⁴;

"listed issuer" means an issuer any of the securities of which are listed and posted for trading, or traded, on The Toronto Stock Exchange, The Montreal Exchange, the Alberta StockExchange or the Vancouver Stock Exchange;

"non-transferable option" means an option the terms of which prohibit transfer except in the case of

(a) the death of the individual option holder⁽⁵⁾,

(b) a transaction described in section 6.1 whether the transaction is a trade, or

(c) a transfer to

(i) a spouse of the option holder,

(ii) a minor child⁽⁶⁾ of the option holder,

(iii) a minor grandchild⁶ of the option holder, or

(iv) a trust, of which at least one of the trustees is the option holder and the beneficiaries of which are one or more of the option holder and a person referred to in subparagraph (i), (ii) and(iii);

"outstanding issue" means

(a) for the purposes of subparagraphs 3.2(a)(ii) and (iv), the number of shares of the applicable class outstanding immediately before the share issuance for which the determination is to bemade, excluding shares issued as or under incentives during the preceding 12 month period, or

(b) otherwise, the number of shares of the applicable class outstanding;

"related person"⁽⁷⁾, for an issuer, means

(a) a director or senior officer of the issuer, or

(b) an associate of a director or senior officer of the issuer;

"service provider option" means an option granted to an employee, an executive or a consultant;

"service provider plan" means a plan providing for the grant or issue of securities to employees, executives, consultants or any combination of employees, executives and consultants;

"shareholder approval" means, for an incentive, incentive plan, or amendment to an incentive or incentive plan, of an issuer, approval given by a majority of the votes cast at a meeting ofthe shareholders of the issuer other than votes attaching to securities beneficially owned by

(a) related persons to whom securities may be issued under the incentive or incentive plan, and

(b) associates of the persons referred in paragraph (a);

"support agreement" includes an agreement to provide assistance in the maintenance or servicing of indebtedness of the borrower and an agreement to provide compensation for the purposeof maintaining or servicing indebtedness of the borrower; and

"underlying security" means

(a) a security that is issued or transferred in accordance with the terms of a convertible security, or

(b) any other security issued or transferred as a result of the conversion or exchange, directly or indirectly, of the first security referred to in paragraph (a) or a security referred to in thisclause.

1.2 Interpretation

(1) In this Rule, trades in a security of an issuer to or by

(a) a consultant, include trades made to or by the consultant's consultant company, the consultant's consultant partnership, or a RRSP or a RRIF established by or for the consultant or underwhich the consultant is the beneficiary;

(b) an employee, includes trades made to or by a subsidiary entity of the employee or a RRSP or a RRIF established by or for the employee or under which the employee is the beneficiary;and

(c) an executive, includes trades made to or by a subsidiary entity of the executive or a RRSP or a RRIF established by or for the executive or under which the executive is the beneficiary.

(2) In this Rule, a person or company is considered to be an affiliated entity of another person or company if one is a subsidiary entity of the other or if both are subsidiary entities of thesame person or company, or if each of them is controlled by the same person or company.

(3) In this Rule, a person or company is considered to be controlled by a person or company if

(a) in the case of a person or company

(i) voting securities of the first-mentioned person or company carrying more than 50 percent of the votes for the election of directors are held, otherwise than by way of security only, by orfor the benefit of the other person or company, and

(ii) the votes carried by the securities are entitled, if exercised, to elect a majority of the directors of the first-mentioned person or company;

(b) in the case of a partnership that does not have directors, other than a limited partnership, the second-mentioned person or company holds more than 50 percent of the interests in thepartnership; or

(c) in the case of a limited partnership, the general partner is the second-mentioned person or company.

(4) In this Rule, a person or company is considered to be a subsidiary entity of another person or company if

(a) it is controlled by

(i) that other, or

(ii) that other and one or more persons or companies, each of which is controlled by that other, or

(iii) two or more persons or companies, each of which is controlled by that other; or

(b) it is a subsidiary entity of a person or company that is that other's subsidiary entity.

(5) In this Rule, the term "special relationship", when used in reference to a person or company in a special relationship with a reporting issuer, shall be interpreted in accordance withsubsection 76(5) of the Act.

(6) In this Rule, the participation of an employee, issuer-officer or consultant in a trade is considered voluntary if the employee, officer or consultant is not induced to purchase the security

(a) in the case of an employee, by expectation of the employee's employment or continued employment by the issuer or an affiliated entity of the issuer;

(b) in the case of an issuer-officer of the issuer or an affiliated entity of the issuer, by expectation of the issuer-officer's appointment or employment or continued appointment or employmentas an issuer-officer of the issuer⁽⁸⁾; and

(c) in the case of a consultant, by expectation of the individual consultant, the consultant's consultant company or the consultant's consultant partnership being engaged or continuing to beengaged by the issuer or an affiliated entity of the issuer as a consultant;

(7) In this Rule, an issuer is considered to have a de minimis Ontario market if, at the relevant time, in the case of securities of each class of the issuer

(a) persons or companies whose last address as shown on the books of the issuer is in Ontario and who held securities of the class of securities

(i) did not hold more than 10 percent of the outstanding securities of the class of securities, and

(ii) did not represent in number more than 10 percent of the total number of holders of securities of the class of securities; or

(b) persons or companies who are in Ontario and who beneficially own securities of the class of securities

(i) did not beneficially own more than 10 percent of the outstanding securities of the class of securities, and

(ii) did not represent in number more than 10 percent of the total number of holders of securities of the class of securities.

PART 2 TRADES BY AN ISSUER, AN AFFILIATED ENTITY OR ADMINISTRATOR OF SECURITIES OF THE ISSUER'S OWN ISSUE TO EMPLOYEES,CONSULTANTS AND ADMINISTRATORS

2.1 Removal of Exemption for Trades under Paragraph 19 of Subsection 35(1) and Clause 72(1)(n) of the Act - The exemptions contained in paragraph 19 of subsection 35(1) andclause 72(1)(n) of the Act are not available for a trade.

2.2 Exemption for Trades by an Issuer or Administrator of Securities of the Issuer's Own Issue to Employees, Consultants and Administrators

(1) Sections 25 and 53 of the Act do not apply to a trade by an issuer or an employee administrator of an issuer in a security of the issuer's own issue to an employee of the issuer, aconsultant of the issuer or an employee administrator of the issuer, if the participation of the employee or the consultant in the trade is voluntary.

(2) The exemptions in subsection (1) are not available for a trade to a registrant in connection with a distribution.

2.3 Registration Exemption for Trades by an Affiliated Entity of Securities of the Issuer's Own Issue to Employees, Consultants and Administrators in Furtherance of an ExemptTrade - Section 25 of the Act does not apply to a trade by an affiliated entity of the issuer in furtherance of a trade under section 2.2.

2.4 De Minimis Registration Exemption for Trades by Employees, Consultants and Administrators⁽⁹⁾ - Section 25 of the Act does not apply to a trade by an employee of an issuer, aconsultant of an issuer, or an employee administrator of an issuer on behalf of an employee or a consultant of an issuer, in a security of the issuer's own issue, if

(a) the issuer is not a reporting issuer;

(b) at the time of the acquisition of the security, or in the case of a security acquired on the exercise of a convertible security at the time of the acquisition of the convertible security, theissuer has a de minimis Ontario market; and

(c) the trade is executed

(i) through the facilities of a stock exchange outside Ontario;

(ii) on the Nasdaq Stock Market; or

(iii) on the Stock Exchange Automated Quotation System of the London Stock Exchange Limited.

PART 3 TRADES BY AN ISSUER, AN AFFILIATED ENTITY OR ADMINISTRATOR OF SECURITIES OF THE ISSUER'S OWN ISSUE TO EXECUTIVES ANDADMINISTRATORS

3.1 Exemption for Trades by a Listed Issuer or Administrator of Securities of the Issuer's Own Issue to Executives and Administrators⁽¹⁰⁾ - Sections 25 and 53 of the Act do not applyto a trade by an issuer or an executive administrator of an issuer in a security of the issuer's own issue to an executive of the issuer or an executive administrator of the issuer, if

(a) the issuer is a listed issuer; and

(b) in the case of an executive that is an officer⁽¹¹⁾, the participation of the issuer-officer in the trade is voluntary.

3.2 Exemption for Trades by a Non-Listed Issuer or Administrator of Securities of the Issuer's Own Issue to Executives and Administrators⁽¹²⁾ - Sections 25 and 53 of the Act do notapply to a trade by an issuer which is not a listed issuer or an executive administrator of the issuer in a security of the issuer's own issue to an executive of the issuer or an executiveadministrator of the issuer, if

(a) in the case of the issue of a security as an incentive, prior shareholder approval has been obtained for the incentive or the incentive plan under which the incentive is issued if the issue ofthe incentive is under an incentive plan, and any amendments to the incentive or incentive plan, if the incentive or incentive plan, if amended, as amended, together with all of the issuer'sother previously established or proposed incentives or incentive plans, could result, at any time, in

(i) the number of shares reserved for issuance under stock options granted to related persons⁽¹³⁾ exceeding 10 percent of the outstanding issue,

(ii) the issuance to related persons, within a 12 month period, of a number of shares exceeding 10 percent of the outstanding issue,

(iii) the number of shares reserved for issuance under stock options granted to any one related person and the related person's associates exceeding five percent of the outstanding issue, or

(iv) the issuance to any one related person and the related person's associates, within a 12 month period, of a number of shares exceeding five percent of the outstanding issue;

(b) in the case of the issue of a security as an incentive, the incentive or incentive plan specifies a maximum number of securities, or in the case of options, of underlying securities, issuableunder it, and any approval obtained under paragraph (a) is for that maximum number;

(c) for a trade of a security that consists of the grant of an option, the option is a non-transferable option to purchase securities of the issuer; and

(d) in the case of an executive that is an issuer-officer⁽¹⁴⁾, the participation of the issuer-officer in the trade is voluntary.

3.3 Exemption for Securities of Foreign-Listed Issuers and De Minimis Exemption for Trades by an Issuer or Administrator of Securities of the Issuer's Own Issue to Executivesand Administrators⁽¹⁵⁾ - Sections 25 and 53 of the Act do not apply to a trade by an issuer that is not a listed issuer or an executive administrator of the issuer in a security of the issuer'sown issue to an executive of the issuer or an executive administrator of the issuer

(a) if the issuer is not a reporting issuer;

(b) if

(i) the issuer is a foreign-listed issuer, or

(ii) at the time of the trade, the issuer has a de minimis Ontario market; and

(c) in the case of an executive that is an issuer-officer⁽¹⁶⁾, if the participation of the issuer-officer in the trade is voluntary.

3.4 Registration Exemption for Trades by an Affiliated Entity of Securities of the Issuer's Own Issue to Executives and Administrators in Furtherance of an Exempt Trade -Section 25 of the Act does not apply to a trade by an affiliated entity of the issuer in furtherance of a trade under section 3.1, section 3.2 or section 3.3.

3.5 De Minimis Registration Exemption for Trades by Executives and Administrators⁽¹⁷⁾ - Section 25 of the Act does not apply to a trade by an executive of an issuer, or an executiveadministrator of an issuer on behalf of an executive of the issuer, in a security of the issuer's own issue, if

(a) the issuer is not a reporting issuer;

(b) at the time of the acquisition of the security, or in the case of a security acquired on the exercise of a convertible security at the time of the acquisition of the convertible security, theissuer has a de minimis Ontario market; and

(c) the trade is executed

(i) through the facilities of a stock exchange outside Ontario,

(ii) on the Nasdaq Stock Market, or

(iii) on the Stock Exchange Automated Quotation System of the London Stock Exchange Limited.

PART 4 REQUIRED INFORMATION FOR SHAREHOLDER APPROVAL

4.1 Required Information for Shareholder Approval - In addition to any other requirements of Ontario securities law, if an issuer presents to its shareholders an incentive, incentive plan,or amendment to an incentive or incentive plan, for approval as contemplated by section 3.2, the issuer shall disclose in the information circular for the meeting information respecting theincentive, incentive plan or the amendment to the incentive or incentive plan in sufficient detail to permit shareholders to form a reasoned judgment concerning the matter⁽¹⁸⁾, including

(a) the eligibility of employees, issuer-officers, issuer-directors and consultants to be issued securities under the incentive or incentive plan or amendments¹⁸;

(b) the maximum number of securities, or in the case of options, of underlying securities, issuable under the incentive or incentive plan;

(c) particulars relating to any financial assistance or support agreement to be provided to participants by the issuer or any affiliated entity of the issuer to facilitate the purchase of sharesunder the incentive or incentive plan, including whether the assistance or support is to be provided on a full-, part- or non-recourse basis;

(d) in the case of options, the maximum term and the basis for the determination of the exercise price¹⁸;

(e) particulars relating to the options or other entitlements to be granted under the incentive or incentive plan; and

(f) the number of votes attaching to securities that, to the issuer's knowledge at the time the information is provided, will not be included for the purposes of determining whether shareholderapproval has been obtained.

PART 5 CONTROL PERSON DISTRIBUTIONS TO EMPLOYEES, EXECUTIVES, CONSULTANTS AND ADMINISTRATORS

5.1 Exemption for Control Person Distributions to Employees, Executives, Consultants and Administrators

(1) Sections 25 and 53 of the Act do not apply to a control person distribution of a security of an issuer or an option of which the underlying security is a security of an issuer to an employeeof the issuer, an executive⁽¹⁹⁾ of the issuer, a consultant of the issuer or an administrator of the issuer or by the administrator of that security to an employee of the issuer, an executive of theissuer or a consultant of the issuer, if

(a) for a trade that consists of the grant of an option, the option is a non-transferable option to purchase securities of the issuer; and

(b) the participation of the employee, the consultant, or in the case of an executive that is an issuer-officer, the issuer-officer⁽²⁰⁾, in the trade is voluntary.

(2) The exemptions in subsection (1) are not available for a trade to a registrant in connection with a distribution.

5.2 Exemption for Trades by an Issuer, an Affiliated Entity or Administrator of Securities of the Issuer in Furtherance of a Control Person Distribution - Section 25 of the Act doesnot apply to a trade by an issuer or an affiliated entity of the issuer in furtherance of a trade under section 5.1.

PART 6 PERSONAL TRANSFERS

6.1 Personal Transfers - Section 25 of the Act does not apply to a trade in a security of an issuer

(a) between any of an employee of the issuer, a subsidiary entity of that employee, a RRSP established by or for that employee or under which that employee is the beneficiary and a RRIFestablished by or for that employee or under which that employee is the beneficiary;

(b) between any of an executive of the issuer, a subsidiary entity of that executive, a RRSP established by or for that executive or under which that executive is the beneficiary and a RRIFestablished by or for that executive or under which that executive is the beneficiary; or

(c) between any of an individual who is a consultant of the issuer, that individual's consultant company, that individual's consultant partnership, a RRSP established by or for that individualor under which that individual is the beneficiary and a RRIF established by or for that individual or under which that individual is the beneficiary.

PART 7 REMOVAL OF CERTAIN EXEMPTIONS FOR TRADES OF SECURITIES OF CERTAIN COMPANIES

7.1 Removal of Certain Exemptions for Trades of Securities of Certain Companies - The exemptions contained in paragraph 10 of subsection 35(2) and clause 73(1)(a) of the Act arenot available for a trade of a security of a subsidiary company of an employee or an executive, or a consultant company, if the company has acquired securities under an exemption containedin this Rule and at the time of the trade holds the securities, unless a trade of the securities acquired by the company to the purchaser would have been permitted under section 9.1.

PART 8 TRADES MADE BY CURRENT OR FORMER EMPLOYEES, EXECUTIVES OR CONSULTANTS, OR ADMINISTRATORS OF SECURITIES OF CERTAIN NON-REPORTING ISSUERS

8.1 Exemption for Trades Made by Current or Former Employees, Executives or Consultants, or Administrators of Securities of Certain Non-Reporting Issuers

(1) Sections 25 and 53 of the Act do not apply to a trade by a current or former employee of an issuer, a current or former executive of an issuer, a current or former consultant of an issuer oran administrator of an issuer in a security of the issuer to an employee of the issuer, an executive of the issuer, a consultant of the issuer or an administrator of the issuer, if

(a) the participation in the trade of the employee, the consultant, or in the case of an executive that is an issuer-officer, the issuer-officer⁽²¹⁾, to whom the trade is made is voluntary;

(b) the issuer is not a reporting issuer; and

(c) the price of the security being traded is established by a generally applicable formula or similar provisions contained in a written agreement among some or all of the shareholders of theissuer to which the transferee is, or upon becoming a transferee, will be required to be, a party⁽²²⁾.

(2) In this section, the references to "current" and "former" refer to the status at the relevant time of the individual employee, the individual executive and, in the case of a consultant, thestatus of the individual consultant or the consultant's consultant company or consultant partnership.

8.2 Registration Exemption for Trades by an Issuer or an Affiliated Entity of Securities of the Issuer in Furtherance of Exempt Trades made by Current or Former Employees,Executives or Consultants of Certain Non-Reporting Issuers - Section 25 of the Act does not apply to a trade by an issuer or an affiliated entity of the issuer in furtherance of a tradeunder section 8.1.

PART 9 RESTRICTIONS ON FIRST TRADES IN SECURITIES ACQUIRED UNDER EXEMPTIONS IN RULE

9.1 Restrictions on First Trades in Securities Acquired Under Exemptions in Rule

(1) A person or company, other than an associated consultant or an investor consultant of the issuer of the security, may trade a security acquired under the exemption from the requirementsof section 53 of the Act contained in section 2.2, section 3.1, section 3.2, section 3.3, section 5.1 or section 8.1 or in the circumstances described in paragraph (d) only

(a) if the first trade is made under a prospectus for which a receipt has been obtained from the Director;

(b) if the first trade is made under an exemption in Ontario securities law from section 53 of the Act;

(c) if

(i) at the time of the trade, the issuer of the security is a reporting issuer and has been a reporting issuer for at least 12 months,

(ii) in the case of a person or company that is in a special relationship with the issuer, the person or company has reasonable grounds to believe that the issuer is not in default under the Actor the regulations,

(iii) in the case of a security acquired under the exemption contained in section 2.2, section 3.1, section 3.2⁽²³⁾ or section 5.1, disclosure to the Commission has been made of the trade undersection 2.2, section 3.1, section 3.2 or section 5.1 in accordance with Part 10,

(iv) no unusual effort is made to prepare the market or to create a demand for the security and no extraordinary commission or consideration is paid for the trade, and

(v) the trade is not a control person distribution; or

(d) if the trade is a trade referred to in section 6.1 or section 8.1.

(2) An associated consultant or an investor consultant of an issuer may trade a security of the issuer acquired, or an underlying security of the issuer acquired directly or indirectly as a resultof acquiring a security, under the exemption from the requirements of section 53 of the Act contained in section 2.2 or section 5.1 or in the circumstances described in paragraph (d) only

(a) if the first trade is made under a prospectus for which a receipt has been obtained from the Director;

(b) if the first trade is made under an exemption in Ontario securities law from section 53 of the Act;

(c) if

(i) at the time of the trade, the issuer of the security is a reporting issuer,

(ii) in the case of a person or company that is in a special relationship with the issuer, the person or company has reasonable grounds to believe that the reporting issuer is not in defaultunder the Act or the regulations,

(iii) in the case of a security acquired under the exemption in section 2.2 or section 5.1, disclosure to the Commission has been made of the trade under section 2.2 or section 5.1 inaccordance with Part 10,

(iv) the hold period has elapsed from the later of the date of the acquisition of the security acquired under the exemption in section 2.2 or section 5.1 and the date the issuer of the securitybecame a reporting issuer⁽²⁴⁾,

(v) no unusual effort is made to prepare the market or to create a demand for the security and no extraordinary commission or consideration is paid for the trade, and

(vi) the trade is not a control person distribution; or

(d) if the trade is a trade referred to in section 6.1 or 8.1.

PART 10 DISCLOSURE OF EXEMPT TRADES

10.1 Disclosure - The disclosure contemplated by section 9.1 for securities acquired under the exemptions contained in sections 2.2, 3.1, 3.2⁽²⁵⁾ and 5.1 shall, and the disclosure contemplatedby clause 72(5)(b) of the Act for securities acquired on the exercise of service provider options under the exemption contained in subclause 72(1)(f)(iii) of the Act may, be made inaccordance with this Part.

10.2 Disclosure Before Resale - The disclosure referred to in section 10.1 may be made by the issuer or, for securities acquired under the exemption contained in section 5.1, by the issueror the person or company making the distribution, by disclosing the date of the trade, the number of securities purchased and the purchase price paid or to be paid, in

(a) an information circular or take-over bid circular filed in accordance with the regulations; or

(b) a letter filed by a person or company certifying that the person or the company has knowledge of the facts contained in the letter

if in either case the filing is effected before any resale of the securities.

10.3 Annual Disclosure - The disclosure referred to in section 10.1 may also be made by the issuer, for a service provider plan, when the service provider plan is commenced and, forsecurities issued or traded other than under a service provider plan, when the initial security is issued or traded, and not less frequently than annually after the first disclosure, if the numberof securities of the class of securities issued or sold in any calendar month in reliance on the exemptions described in section 10.1 does not exceed one percent of the securities of that classthat were outstanding at the beginning of the calendar month in which the securities were issued or sold.

10.4 Monthly Disclosure

(1) If the number of securities of the class of securities issued or sold in any calendar month in reliance on the exemptions described in section 10.1 does exceed one percent of the securitiesof that class that were outstanding at the beginning of the calendar month in which the securities were issued or sold, the disclosure referred to in section 10.1 may be made by the issuer forthat calendar month, within 10 days after the end of the month.

(2) The issuer may make disclosure in accordance with section 10.3 for the other calendar months in the annual period excluding such month or months for which disclosure has been madeunder subsection (1).

10.5 ⁽²⁶⁾Form of Disclosure - For the purposes of sections 10.3 and 10.4, the disclosure may be made in the form of a letter filed disclosing the date of the trade, the number of securitiespurchased and the purchase price paid or to be paid, and certifying that the person or the company has knowledge of the facts contained in the letter.

PART 11 FEES

11.1 Fees

(1) The issuer shall pay a fee of $100.00 for the securities issued under the exemptions contained in sections 2.2, 3.1, 3.2 and 3.3 and securities acquired on the exercise of service provideroptions in reliance on the exemption contained in subclause 72(1)(f)(iii) of the Act and, subject to subsection (3), the person or company making the distribution shall pay a fee of $100.00for the securities distributed under the exemption contained in section 5.1

(a) for all securities distributed under a service provider plan

(i) on the date the service provider plan is commenced, and

(ii) on each anniversary of the date of commencement of the service provider plan, if securities were issued or distributed in Ontario under the service provider plan during the twelve-monthperiod preceding the date of the anniversary; and

(b) if securities are issued or distributed under these exemptions other than under a service provider plan

(i) when the initial security is issued or distributed, and

(ii) on each anniversary of the date of the issue or distribution of the initial security, if additional securities were issued or distributed in Ontario by that person or company during the 12month period before the date of the anniversary.

(2) Despite subsection (1), no fee shall be payable for securities acquired under the exemptions contained in this Rule for a trade by an employee administrator or executive administrator toan employee, an executive or a consultant.

(3) The issuer may pay the fee for securities distributed under the exemption contained in section 5.1 referred to in subsection (1) and in this case the person or company making thedistribution shall not be required to make that payment.

PART 12 EXEMPTION

12.1 Exemption - The Director may grant an exemption to this Rule, in whole or in part, subject to such conditions or restrictions as may be imposed in the exemption.

Appendix "A"

List of Commenters on Proposed Rule 45-503

Trades to Employees, Executives and Consultants

1. The Securities Law Sub-Committee of the Business Law Section of the Canadian Bar Association (Ontario)

2. BCE Inc.

3. P.A.D. Mingay, Co-Chair of the Finance Committee of the Toronto Bio-Technology Initiative

 

Footnotes

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1. This proposed Rule is derived from the Rule In The Matter of Trades By An Issuer In Securities Of Its Own Issue To Senior Officers, Directors, Personal Holding Companies AndRegistered Retirement Savings Plans and a Controlling Shareholder In Securities Of An Issuer to Employees, Senior Officers, Directors, Personal Holding Companies And Registered RetirementSavings Plans March 7 (1997), 20 OSCB 1218. That Rule incorporated by reference the Blanket Ruling of the same name, (1994), 17 OSCB 5518 ("the Blanket Ruling"). The proposed Rule was firstpublished for comment on February 20, 1998 (1998) 21 OSCB 1123 (the "February Proposed Rule").

2. The definition of "consultant" is used in this Rule to provide exemptions from the registration and prospectus requirements for trades made by an issuer or anaffiliated entity of the issuer in securities of the issuer's own issue, or by a controlling shareholder, to a consultant as so defined. After consideration ofcomments received on the February Proposed Rule and further review, the Commission has determined to revise the definition of "consultant" from thatcontained in the February Proposed Rule. The definition has been revised by deleting the requirements for (a) "ongoing" services, (b) possession of technical,business, management or other expertise of value of the issuer or an affiliated entity of the issuer and (c) the consultant having a relationship with the issuer or anaffiliated entity of the issuer that enables the individual to be knowledgeable concerning the business and the affairs of the issuer. The Commission determinedthese requirements were overly restrictive, having regard to the fact no such restrictions are imposed on the use of these exemptions for employees, and also thatthese restrictions were not sufficiently objective for the purposes of a rule. While the Commission has retained the requirement that the consultant spend asignificant amount of time and attention on the affairs and business of the issuer or an affiliated entity of the issuer (as an employee normally would), to providecertainty for the purposes of the Rule the provision has been revised to provide that this determination is to be made in the reasonable opinion of the issuer. Therequirement that the consultant provide consulting, technical, management or other services to the issuer or an affiliated entity of the issuer has been revised toprovide that these services be provided on a bona fide basis. The definition has also been revised to require that the consultant provide these services under a written contract, to provide forcertainty and to ensure privity between the consultant and the issuer or the affiliated entity.

3. The Blanket Ruling defined "executives" as non-employee senior officers and non-employee directors of the issuer or affiliates of the issuer. In the FebruaryProposed Rule, the definition of "executive" was used for both the purposes of (a) determining the persons for whom the exemptions in Part 3 would beavailable, subject to the restrictions set forth in that Part, and (b) determining the persons who would be included for the purposes of the quantitative restrictionson the use of the exemptions contained in section 3.2, by including the term "executive" in the definition of "related person". The definition of "executive" in theFebruary Proposed Rule was broadened from that in the Blanket Ruling to include all officers and directors of issuers, so that the restrictions in Part 3 on the useof the exemptions would apply to all employees who were officers or directors of the issuer. However, the definition in the February Proposed Rule wasnarrowed from that in the Blanket Ruling to exclude employee senior officers and directors of affiliated companies, so that these restrictions would not apply tosuch persons. The definition of "related person" has been changed to replace the reference to "executive" with "director or senior officer", so that thequantitative restrictions contained in section 3.2 will now only refer to directors and senior officers. The definition of "executive" has been broadened from thatcontained in the February Proposed Rule to now include all officers and directors of affiliated entities of the issuer, to make the exemptions available for non-employee officers and non-employee directors of affiliated entities of the issuer. This would include an exemption for non-employee senior officers and non-employee directors of affiliates, as was the case under the Blanket Ruling. See the definition of "related person" and the related footnote.

4. The definitions of "issuer-director" and "issuer-officer" have been added to facilitate an expansion of the definition of "executive" from that contained in theFebruary Proposed Rule so as to include officers and directors of affiliated entities of the issuer. This will make the exemptions in Part 3 available for non-employee officers and non-employee directors of affiliated entities. See footnote 3. The terms "issuer-director" and "issuer-officer" have been developed, as"director" and "officer" both have different meanings under the Act and the terms "director" and "officer" are used in this Rule with those meanings.

5. One of the conditions contained in the Blanket Ruling was that, if the trade in securities consisted of a grant of an option to an Executive, Executive Companyor Executive RRSP (as defined in the Blanket Ruling) to purchase securities, the option be non-transferable, except that in the case of an Executive's death, theoption could be exercised by such Executive's legal representatives in accordance with the terms of the option. The February Proposed Rule revised this aspectof the definition of "non-transferable option" to provide that the option was transferable in the case of the death of an individual optionholder. This changewould allow for beneficiary designation and exercise of the option by such designated beneficiary upon the death of the optionholder, if such transfers werepermitted under other applicable legislation and the terms of the option. Although this aspect of the definition of "non-transferable option" has not been changedfrom the February Proposed Rule, the Commission believed that it would be helpful to draw attention to this change from the Blanket Ruling in connection withthis re-publication of the Rule for comment.

6. The definition of "non-transferable option" has been revised to clarify that transfers are permitted to minor children and minor grandchildren of theoptionholder, but not to other children or grandchildren of the optionholder.

7. The definition of "related person" has been narrowed from that contained in the February Proposed Rule by replacing the reference to "executive" with areference to "a director or senior officer", so as to exclude officers other than senior officers from the quantitative restrictions in section 3.2. This would beconsistent with the definition of "insider" in the TSE Rules which is used for the same purpose. See footnote 3. As noted in the footnotes to the FebruaryProposed Rule, the term "related person" is used, rather than "insider" as is the case under the TSE Rules, as it has a different meaning than the term "insider"under the Act.

8. The phrase " ... if the participation of the (employee) (issuer-officer) (consultant) in the trade is voluntary" is used in a condition for exemptions in the Rule,and reflects the condition in paragraph 19 of subsection 35(1) and clause 72(1)(n) of the Act that those exemptions are available only if the employees are not"induced to purchase by expectation of employment or continued employment". The February Proposed Rule contained a condition that, in the case of anexecutive that was a non-employee director, the individual director was not induced to purchase the security by expectation of the director's appointment,election or re-election as a director of the issuer. This was a change from the Blanket Ruling, which did not contain this condition for the use of the exemptionfor trades to directors. After consideration of comments on the February Proposed Rule, the Commission has determined that it is not inappropriate for issuers,if they so wish, to impose share ownership as a condition of being a director without losing the benefit of the exemption, and accordingly there will now be nochange in this regard from the provisions contained in the Blanket Ruling.

9. In the February Proposed Rule, section 2.4 provided a new registration exemption for trades by employees, employee subsidiary entities, employee RRSPs andemployee RRIFs, consultants, their companies, partnerships, RRSPs and RRIFs, and employee administrators on behalf of employees or consultants, if the issuerhad a de minimis market in Ontario at the time of the initial acquisition of the security. The de minimis tests, utilizing in the alternative a registered holder and a beneficial holder test, are identical tothe tests used in Rule 45-502 Dividend or Interest Reinvestment and Stock Dividend Plans, April 10 (1998), 21 OSCB 2323. A new condition has been added, namely, that the issuer is not a reportingissuer, as the Commission believes this de minimis exemption should not be available to an issuer which is a reporting issuer in Ontario.

10. Section 3.1 of the February Proposed Rule provided the exemption previously provided by the Blanket Ruling for trades to non-employee senior officers andnon-employee directors of the issuer and (by virtue of the interpretation under the Rule that trades to or by executives include trades to or by executivesubsidiary entities and executive RRSPs and RRIFs) to their companies and RRSPs, for listed issuers (being issuers any of the securities of which are listed onspecified Canadian stock exchanges) and extended the exemption to trades to other executive subsidiary entities and executive RRIFs. As the FebruaryProposed Rule expanded the definition of "executive" from that contained in the Blanket Ruling to include officers and directors who are employees, section 3.1of the February Proposed Rule provided the exemption provided by paragraph 19 of subsection 35(1) and clause 72(1)(n) of the Act for such individuals and also(again by virtue of the interpretation under the Rule in subsection 1.2(1)) provided the exemption provided by the Blanket Ruling for their companies and RRSPsand extended the exemption to trades to other executive subsidiary entities and executive RRIFs. The Blanket Ruling also provided the exemption to non-employee senior officers and non-employee directors of affiliated companies. The Blanket Ruling provided the exemption to non-employee senior officers andnon-employee directors of affiliated companies. However, the February Proposed Rule did not extend the exemption to non-employee directors and non-employee officers of affiliated companies or entities of issuers. After consideration of comments and further review, the Commission has revised section 3.1 toextend the exemption to non-employee directors and non-employee officers of affiliated entities. See footnote 3 relating to the definition of "executive".

11. See footnote 8 relating to subsection 1.2(6).

12. Section 3.2 of the February Proposed Rule provided the exemption previously provided by the Blanket Ruling for trades to non-employee senior officers andnon-employee directors of issuers and (by virtue of the interpretation under the Rule that trades to or by executives include trades to or by executive subsidiaryentities and executive RRSPs and RRIFs) to their companies and RRSPs, for issuers who were not listed issuers where such issuers complied with the conditionsset forth in section 3.2, and extended the exemption to trades to other executive subsidiary entities and executive RRIFs. As the February Proposed Ruleexpanded the definition of "executive" from that contained in the Blanket Ruling to include officers and directors who were employees, section 3.2 of theFebruary Proposed Rule provided the exemption provided by paragraph 19 of subsection 35(1) and clause 72(1)(n) of the Act for such individuals and also(again by virtue of the interpretation under the Rule in subsection 1.2(1)) provided the exemption provided by the Blanket Ruling for their companies andRRSPs, and extended the exemption to trades to other executive subsidiary entities and executive RRIFs. Section 3.2 of the February Proposed Rule extendedthe exemption to non-employee officers of issuers who were not senior officers. The Blanket Ruling also provided the exemption to non-employee seniorofficers and non-employee directors of affiliated companies. However, the February Proposed Rule did not extend the exemption to non-employee directors andnon-employee officers of affiliated entities of issuers. After consideration of comments and further review, the Commission has determined to revise section 3.2to extend the exemption to non-employee directors and non-employee officers of affiliated entities. See footnotes 3 and 7 relating to the definitions of"executive" and "related person".

13. See footnote 7 relating to the definition of "related person".

14. See footnote 8 relating to subsection 1.2(6).

15. In the February Proposed Rule, section 3.3 provided registration and prospectus exemptions for trades of securities of foreign-listed issuers or issuers whohad a de minimis market in Ontario. The provision provided an exemption for trades by issuers or executive administrators to executives of the issuer and their subsidiary entities, RRSPs and RRIFsand executive administrators, for issuers who were not listed issuers and that did not meet the requirements set out in section 3.2, if such issuers were foreign-listed issuers or had a de minimis market inOntario. A new condition has been added, namely, that the issuer is not a reporting issuer, as the Commission believes that the de minimis exemption should not be available to an issuer which is areporting issuer in Ontario. See footnote 11 relating to section 2.4. By virtue of the change to the definition of the term "executive", the exemption in section 3.3 has been extended to non-employeedirectors and non-employee officers of affiliated entities of the issuer. See footnote 3 relating to the definition of "executive".

16. See footnote 8 relating to subsection 1.2(6).

17. In the February Proposed Rule, section 3.5 provided a new registration exemption for trades by executives, executive subsidiary entities, executive RRSPsand executive RRIFs, and executive administrators on behalf of executives, if the issuer had a de minimis market in Ontario at the time of the initial acquisition of the security. Anew condition has been added, namely, that the issuer is not a reporting issuer, as the Commission believes the exemption should not be available to an issuer which is a reporting issuer in Ontario. Seefootnote 9 relating to section 2.4. By virtue of the change to the definition of the term "executive", the exemption in section 3.5 has been extended to non-employee directors and non-employee officers ofaffiliated entities of the issuer. See footnote 3 relating to the definition of "executive".

18. The Commission has revised section 4.1 to provide greater clarity as to the required standard for disclosure and to provide for additional specific disclosurerequirements relating to the categories of eligible participants and option term and the basis for option pricing.

19. By virtue of the change to the definition of the term "executive", the exemption in section 5.1 has been extended to non-employee directors and non-employee officers of affiliated entities of the issuer. See footnote 3 relating to the definition of "executive".

20. See footnote 8 relating to subsection 1.2(6).

21. See footnote 8 relating to subsection 1.2(6).

22. Paragraph 8.1(1)(c) has been revised to clarify the required parties to the agreement referred to in that paragraph.

23. The references to disclosure of securities acquired under the exemptions contained in section 3.3 has been deleted to avoid confusion as the first trade reliefin clause 9.1(c) would not be available for a security acquired under the exemption in section 3.3. A condition of clause 9.1(c) is that the issuer is a reportingissuer, while a condition of the exemption in section 3.3 is that the issuer is not a reporting issuer. Securities acquired under the exemption in section 3.3 wouldlikely be resold under the first trade relief in clause 9.1(b), as it incorporates the first trade relief contained in Rule 72-501 Prospectus Exemption for First Trade Over aMarket Outside Ontario (1998), 21 OSCB 3688. Accordingly, as is currently the case, disclosure will not be required of trades of securities of issuers which have a de minimis Ontario market andwhich are not Ontario reporting issuers.

24. Subparagraph 9.1(2)(c)(iv) has been revised to clarify that, in the case of a security acquired on the exercise of an option, the hold period commences on thedate of the acquisition of the option.

25. The reference to section 3.3 in section 10.1 has been deleted to avoid confusion, as section 9.1 does not contemplate disclosure for securities acquired underthe exemption contained in section 3.3. See footnote 23 relating to section 9.1.

26. Section 10.5, which was contained in the February Proposed Rule and which related to the exception from the annual and monthly disclosure provisions forcontrol person distributions, has been deleted as control persons are excepted from the first trade relief under section 9.1(1)(c) and accordingly no disclosurewould be required under Part 10 for such a trade.